“If the Fed moved from strict mark to market accounting, the biggest beneficiaries may not be the huge banks that rallied so hard. It could be Bank of New York one of the two companies that have otherwise basically no mortgage exposure so if the accounting rules change like we accept these two will soar…It’s a huge change and only a handful of people expect it and my sources, I think they know now you should absolutely not buy State Street or Bank of New York tomorrow. This is a slow and deliberate jail break. Tomorrow, the president is meeting with the big bank CEOs to talk about TARP…It’s why I’m telling you to wait until Monday when this meeting is over and the potential damage is done before you pull the trigger, and I do want you to pull the trigger because I have a good hand on these accounting rules on State Street and Bank of New York. Buy them on weakness. We never chase on this show. We buy weakness. They’re in great businesses.
The bottom line, we’re springing back Bank of New York and State Street, do your homework. I don’t think you should buy until Monday because of the President’s meeting with the CEOs. If these accounting standards I talked about are changed and Bank of New York and State Street will lead the comeback with a wave of an accounting wand, they could have the least risk and the most reward. If you get the bank stock sell-off, I want you to reach for State Street and Bank of New York first and save the rest for later.”
Cramer has an interesting take on the discussion surrounding mark to market accounting rules. In the most basic terms, these rules force banks to value their assets at the amount they would receive in the marketplace, even if they have no intent to sell them. Many place some of the blame for the current mess on the fact that mark to market rules have deepened the crisis, forcing banks to take massive write-downs on assets that could be worth much more in the coming years. We at Ockham, like many market observers, would like to see some sort of adjustment made to these accounting rules that are hamstringing many financial stocks. Surely, as Cramer notes, if these rules were to be repealed financial stocks would get a very nice boost.
Cramer is directing his viewers towards a somewhat derivative beneficiary of the possible rule changes. Bank of New York (BK) and State Street (STT) are two of the largest custodian banks in the world, and are essentially the bank’s banks. Meaning, they are responsible for tracking, processing and taking care of the substantial amount of back office transactions for many of the largest financial institutions. So, these two banks, with no direct alt-a mortgage exposure or other risky debt that would be aided by amendments to market to market rules, have loads of indirect exposure to those assets through its clients. If you want to play the mark to market accounting changes, these two stocks are a great place to look. They have far less risk than many of the banks they service, but have lots of potential upside from a change.
The Ockham methodology has a Fairly Valued valuation on both of these stocks, but there is no denying the potential upside from just a stroke of the pen. There is no guarantee whatsoever that these rules will be changed but if they do it could mean a lot more revenue coming to the custodian banks.